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05/04/2008

The Outlandish Farm Subsidies--Posner

The President has expressed dissatisfaction with the proposed Farm Bill wending its way through Congress. He wants farmers whose annual incomes exceed $200,000 to be denied subsidies; the present cutoff is $2.6 million and Congress will not go below $950,000. The President's concern with farm subsidies cannot be taken very seriously, since in 2002 the Republican Congress with Administration connivance greatly increased these subsidies and at the same time repealed some of the modest reforms that the Clinton Administration had introduced in 1996. The Administration's current proposals would, if enacted, be a step in the right direction, but they will not be enacted, and, judging from the 2002 legislation, they are intended I suspect merely to embarrass the Democratic Congress.
The deregulation movement passed agriculture by, leaving in place a series of government programs that lack any economic justification and at the same time are regressive. They should offend liberals on the latter score and conservatives on the former; their firm entrenchment in American public policy illustrates the limitations of the American democratic system. A million farmers receive subsidies in a variety of forms (direct crop subsidies, R&D, crop insurance, federal loans, ethanol tariffs, export subsidies, emergency relief, the food-stamp program, and more), which will cost in the aggregate, under the pending Farm Bill, some $50 billion a year, or $50,000 per farmer on average. Farm subsidies account for about a sixth of total farm revenues. So, not surprisingly, the income of the average farmer is actually above the average of all American incomes, and anyway 74 percent of the subsidies go to the 10 percent largest farm enterprises. The subsidies are regressive, especially during a recession coinciding with worldwide food shortages (i.e., high prices).
There is no justification for the Farm Bill in terms of social welfare. The agriculture industry does not exhibit the symptoms, such as large fixed costs, that make unregulated competition problematic in some industries, such as the airline industry, about which Becker and I blogged recently. It is true that crops are vulnerable to disease, drought, floods, and other natural disasters, but the global insurance industry insures against such disasters, and in addition large agricultural enterprises can reduce the risk of such disasters by diversifying crops and by owning farm land in different parts of the nation and the world. If a farm enterprise grows soybeans in different regions, a soybean blight in one region, by reducing the supply of soybeans, will increase the price of soybeans, so the enterprise will be hedged, at least partially, against the risk of disaster. Supply fluctuations due to natural disaster create instability in farm prices, but farmers can hedge against such instability by purchasing future or forward contracts. There is no "market failure" problem that would justify regulating the farm industry. All the subsidies should be repealed.
This of course will not happen, and that is a lesson in the limitations of democracy, at least as practiced in the United States at this time, though I doubt that it is peculiarities of American democracy that explain the farm programs, for their European counterparts are far more generous. The small number of American farmers is, paradoxically, a factor that facilitates their obtaining transfer payments from taxpayers. They are so few that they can organize effectively, and being few the average benefit they derive (the $50,000 a year) creates a strong incentive to contribute time and money to securing the subsidies. The free-rider problem that plagues collective action is minimized when the benefit to the individual member of the collective group is great. Then too many of the members of the farm community and hence recipients of the subsidies are wealthy, and the wealthy have great influence in Congress as a result of the lack of effective limitations on private financing of congressional campaigns and on lobbying generally. In addition, the allocation of two senators to each state regardless of population enhances the political power of sparsely populated states, which tend to be disproportionately agricultural. The key role of Iowa in the presidential electoral process is a further barrier to the abolition of farm subsidies, and the final factor is the alliance of urban with farm interests in support of the food-stamp program, itself inferior to a negative income tax, which would give the poor money but allow them to make their own consumption choices.
A puzzle about the farm programs is the heavy emphasis on money subsidies, since by reducing the cost of farming they encourage greater output, which results in lower prices for farm products, thus offsetting some, perhaps much, of the effect of the subsidies. (The lower prices are not a social benefit, because as the result of subsidization they are below cost.) Acreage restrictions, which used to be the core of federal farm policy, and which correspond to the type of entry-limiting regulations imposed on airlines, railroads, trucking, pipelines, long-distance telecommunications, banking, and the wholesale sale of electricity, before the deregulation movement, are more efficient at raising farmers‚Äô incomes by reducing output, in effect cartelizing agriculture. Those restrictions have been reduced, but between them and export subsidies (which reduce the supply of agricultural products to American consumers) farm prices in America are higher than they would be without the farm programs, and this contributes to the regressive effects of the programs.

Comments

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Thank you. I teach environmental economics and continually make the case that agricultural subsidies are horrible policy in every way. But things get worse when we factor in all forms of perverse subsidies to fisheries, forestry, energy, and water- which total near $1 trillion per year. Perhaps you can extend your commentary to this larger class of subsidies at a later date and how we can combat them.

Thank you. I teach environmental economics and continually make the case that agricultural subsidies are horrible policy in every way. But things get worse when we factor in all forms of perverse subsidies to fisheries, forestry, energy, and water- which total near $1 trillion per year. Perhaps you can extend your commentary to this larger class of subsidies at a later date and how we can combat them.

You actually undersell the complexity of the issue. First of all it is impossible to hedge risk geographically like a company might by say keeping their data in different places. There are complicated financial instruments to allow farmers to hedge their risks, but these are exactly the kind of derivatives that are currently being crushed by the liquidity crunch. Nobody understood them well enough to be able to evaluate the risks. If farmers had to take all of the risk on by themselves it would be impossible. If unsubsidized insurance had to take on that risk the premiums would be much higher and the coverage much worse than most people realize in the long run. Which is why crop insurance is one of the only things that is subsidized that should be.

The other thing that should remain subsidized is research because right now best practice in farming doesn't take into account externalities. Basically development of new products for agricultural usage all are ways of making yields somewhat larger, but mostly more predictable through the addition of high capital intensity, low labor intensity inputs. Most of these inputs in terms of larger scale mechanization, chemical fertilizer, herbicide, pesticide, and irrigation. All of these produce negative externalities that private research does not have to include the cost of, and are problematic for the government to determine the cost of and tax.

There is one defense of the food stamp issue that is quite central that isn't addressed here: the fact that it is more to prevent risk than to improve welfare. When there is a price shock in food the government absorbs that damage rather than those in severe poverty through food stamps (theoretically). So if you move to a welfare system based entirely on an EITC expansion it doesn't deal very well with crises, and you would either need price controls or a method of providing subsidized food to the poorest; the latter would just be food stamps by a different name.

That said the fact that the Farm Bill has fewer than a handful of valuable policies in its immense breadth is pretty damning. By far the most important things to do are to eliminate all per unit payments and to eliminate the ethanol tax break. Part of the problem is that many of the methods that could be used to ensure that domestic price levels don't get pushed above a level that would starve those in poverty have been outlawed by the WTO, so that all that we can do to prevent that situation is subsidize domestic production to expand without regard to negative externalities.

The worst part of all is that because of subsidies poorer countries suffer: Argentinians farmers are probably the most efficient in the world but they have to compete not only against the european farmer but also against it's govermente (lately the situation has goten worse: now the argentinina goverment has implemented a "crop tax").

The farm bill as it's headed for House-Senate reconciliation and final passage is a bad bill. That's what the veto pen is about. Republicans, especially, ought to be able to do better. What does McCain say about this dog? Last time I looked, we had 435 Reps and 99 Senators besides Chuck Grassley and Tom Harkin. Acc to what I've heard and read, the U.S. could survive into next year without a farm bill renewal. You know it without hearing it from me: to every lobbyist in Washington representing an industry or interest that's counting on assistance from the public trough, this farm is a test of politics as usual.

Would eliminating the agricultural subsidies lead to significant unemployment of labor and capital? I would imagine that farming inputs are relatively immobile. Should a potential move from the PPF to within the PPF as resources shift be considered when contemplating ending the subsidies?

These subsidies are so longstanding that, while change always is needed, eliminating them would unwind an already fragile sector of the economy. It's not that ag subsidies, in existing or proposed form, are good, but the overriding elements is that the credit, insurance, cooperative, banking, labor, estate plans, state taxation, etc., aspects of our agricultural economy ALL are built in some way around the existence and expectation of subsidies. It took a long, long time to 'grow that crop' and it will not work to just chop half the roots off at once.
Also, limiting subsidies, to only those at the under $200K income level, resides upon the anachronistic premise of 'small, family farms.' There are fewer of those each day, and new ones are all but unheard of. The more successful farmers take over the 100 - 300 acre farms, as their owners become unable to finance year-round operations.
In the main, the question of ag subsidies will not go away. The provision of food is hardly comparable to "airlines, railroads, trucking, pipelines," because food is essential to life, and the declines in domestic farms are real. Also, as long as other countries subsidize their ag, then cheap imports slowly overwhelms this nation's independent production of its own food. Either the Gov't bars cheap imports, adds tariffs to them, or it subsidizes U.S. production. There is no un-regulated option among those equalizers.

Jason: Several decades ago I was sitting in an econ class and was sure the subsidies were a bad idea that short-circuited the power of capitalism to accurately deploy labor and capital and concluded that the government should announce a 20 year phase out. This was before the great consolidation of farms, and the instructor differed; pointing out the low and steadily falling prices of food and various economic problems such as that of "the market" bidding down the price of commodities to below the costs of production.

Still, though seeing his point, I didn't like the concept, and today, as Posner writes it seems to have gotten out of hand with ADM and other powerful lobbyists virtually writing their own ticket. But, overall, as some posters closer to farming, have touched on would getting rid of the system "save" as much as one would think after looking at the cost of the subsidies? ($50 billion?? $500/household?)

My guess is not, as farmers both big and small would have to attract much higher risk capital at much higher cost and small farmers possibly attracting no capital at all. Still, there is the attraction of trending toward a more pure "market" system; but what might we see with Wall Street hot-shots providing the risk capital? Perhaps an unhealthy level of chasing short term profits? A planting of corn everywhere to chase ethanol profits only to face a lot of waste should oil prices drop to the point ethanol becomes unprofitable?

Still, I'd like to see a trend toward lower subsidies, but today it seems even more cumbersome than when I was in that econ class years ago as farm policy not only must fight our own entrenched special interests, but comply with WTO-NAFTA-GATT and farm interests around the world.

It would seem that capping the subsidies at a lower amount, as proposed, would provide security against losses, but as they became a smaller portion of the overall profit picture to give more of an incentive to "make it w/o the subsidies".

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Speaking of commodities being troubled by the tendency to be "bid" down to below the costs of production, and higher prices of food all over the world, I can't help but wonder why it is all so quiet on the western economic front when oil, NG, and coal, none of which are in short supply, are "bid" up, in oil's case, to ten TIMES the costs of production in a few short years.

Does anyone still believe we've a functioning "market" in energy supply?

"So, not surprisingly, the income of the average farmer is actually above the average of all American incomes"

........ I've never been a farmer, and in fact have been a commercial fisherman selling very UN-subsidized salmon against heavily subsidized meat products, but I'd expect the average farmer to earn more than the average wage earner because most are businessmen with a hefty investment, and even those employed are highly productive, technically skilled operators of complex machinery who are likely to work long hours under trying conditions.

Of course, for both wage earners and farmers the "average" today is pulled up by tremendous earnings at the top and is far higher than median earnings which in my view is one of the major problems of our economy today ---- excess capacity and too little demand.

What are your thoughts on treating farm subsidies as a national security issue? My thought process is that this is a key resource and as much production as possible should be kept local so that we maintain access during a crisis. This is obviously similar to our current situation with oil...

Note: I don't necessarily buy into this theory as I have no real data to back this up. It's possible that even without subsidies we would maintain a "decent" level of farm production so that we would be fine during a "crisis".

Paymon: Interesting question, but I think you come close to the answer in your second paragraph. If it's grains grown our our ideal prairies that lend themselves to tremendous levels of mechanization, it would seen there are few who could compete. Then grain goes to meat production where it seems we'd win in all but some of the specialties.

Japan, both subsidizes rice, and puts up stiff tariffs for social reasons and I suppose some similar thoughts of staying independent; US rice growers could halve what the Japanese housewife is paying for rice, but I think they are limited to buying a kilo or so in tourist shops. I believe they still limit the size of rice farms under post WWII programs to provide a small (seven acres??) rice farm to many farmers.

Sometimes it's easier to spot 'silliness' in the policies of others. Imagine that Japan believed in the concept of "relative advantage"; bought all of their rice from the US for half or less of the cost; with a labor shortage due to the aging of their population and resistance to immigration, they might put their farmers to work on projects in which Japan excels. But, pure economic theory may not be the final word as there are benefits of keeping their food yen at home as well as the question of what to do with their rice farming acreage? These are often small plots etched into steep hillsides where mechanized farming wouldn't seem viable, I guess it's rice or perhaps veggies.

Lastly, I'm sure that memories of the US reacting to their expansionist policies of the 30's and cutting off their oil supply, plays a role in "national security" as you mention as, possibly, being one of our concerns. What do you think of interdependence of food and other import-exports as a deterrent to warfare?

It's the subsidies that must be scaled back - even sunsetted in the case of the misguided supports for corn to feed fuel ethanol production. The taxpayer supports corn ethanol to the tune of 51 cents per gallon while we charge Brazilians a 54 cent tariff on sugar cane ethanol. Let's cut the foolishness and start growing more sugar cane in SE Texas, Louisiana, and Mississippi.

I believe you'd get near-universal consensus for maintaining crop disaster relief and access to federal farm credit guarantees. Those programs have served us well and the rules have been proven to be enforceable by administrators, federal prosecutors, and courts.

P.S. I should have said 98 Senators left after I added Harkin to Grassley. God bless Iowa but enough is enough.

Brian, Ha! we're more than a bit selective in our "global economy" policies. Yes on more sugar cane here, and our own policies have put the Mexican sugar industry in the dumpster. Their biggest problem is finding jobs for their young and energetic population while ours is that of feeding our gas hogs; surely there are win-win-win deals to be cut.

Perhaps Marie Antoinette put it best in regards to agriculture and food production, "Well... let them eat cake!" and it cost her her head. I'm not so sure it wouldn't play out that way in this country as well. As for the 2007 Farm Bill that Congress and the Administration are trying to work out, (what? we're into the fifth or sixth extension for completion?) this Bill is only the tip of the iceberg. I won't even mention the 100 billion we gave the Iraqi's last year. This country has a greater underlying problem than the current Farm Bill.

That problem happens too be the budeting method currently used in Washington. That system is the Incremental Budget System. This procedure utilizes essentially, a cost plus method to arrive at an annual budget. It's no wonder it has been spiralling out of control. If we really want to solve these various misallocations of Monies, we need to force the government to convert to using a Zero Based Budgeting System. This eliminates the cost plus annual budget and forces every Department and Agency to justify its annual budetary requirements from zero start point every year. That way we might be able to get the Buget under control and solve some of the current System's misallocations.

A particular legal question that puzzles me is which aspects of US federal agricultural subsidies are supported by which articles or amendments of the constitution? Their general constitutional base seems to be the power of Congress to regulate commerce. Acreage restrictions are restrictions of production, not of commerce: they would seem to fall among the powers of the states, not those of the federal government. Export subsidies seem covered by the power to regualte commerce with foreign nations. But from what constitutional provision do we derive limits on subsidy entitlement related to recipients incomes? Etc. on the detail.

Superb question. It ought to be of concern to every citizen, not just lawyers. During the Great Depression years Congress enacted legislation that empowered federal govt administrators to order restrictions, even bans, on production of designated agricultural grains. They pushed it to the limit with a ban on growing wheat for personal consumption. If I recall correctly there were potential criminal sanctions for violation. In a case by the name of Wickard v. Filburn, the Supreme Court upheld the law as being within the power of Congress to regulate commerce among the States and to enact legislation Congress considers necessary and proper to advance or reinforce that express power. Wickard v. Filburn appears to be durable constitutional precedent. Just two or three years ago the Supreme Court reaffirmed it in Gonzales v. Raich, in which the question was whether the federal narcotics laws swept up enough "commerce" to neuter a State's statutory privilege to possess personal-use quantities of marijuana for ostensibly medicinal purposes. If an article can be "trafficked" in across a State line, Congress can reach it even though it isn't being trafficked.

The Commerce Clause of the U.S. Constitution is the bluntest of razors in implementation. But the Supreme Court's ragged path from the early 1800's to today's sweeping vision is the path of American constitutional law. First impressions notwithstanding, the courts rarely transgress the limits of modesty John Marshall set for them. The constitutional experiment gets sorely tested but Americans of all persuasions seem to want it to endure. We trust (and that's all it is) the courts to get it right.

David, Once you sign up for the dole, you waive many of your Constitutional rights; no one is forcing anyone to apply for a subsidy. Surely, we taxpayers through the "wisdom?" of Congress have the right to determine how our tax revenues will be deployed. Are not "acreage restrictions" a component of the subsidies?

Ha, I'm thinking the greatest test of a true and principled conservative would the that of being against the subsidies or pork that he profits from.

It should also be noted that the current subsidy form came about only in 1996 with acceptance of the WTO. The previous plan would have been a violation of WTO rules, but somehow these are non trade distorting.

Excerpt:
May 8 (Bloomberg) -- Corn rose to a record for the seventh time since the end of March on speculation that planting delays caused by wet weather will reduce yields in the U.S., the world's largest producer and exporter of the crop.

More than 1 inch (2.5 centimeters) of rain fell in the Midwest overnight with a second storm forecast to drop 2 inches tomorrow, said Gail Martell, a senior agricultural meteorologist for New York-based Storm Exchange Inc. Temperatures as much as 15 degrees Fahrenheit below normal during the next week will keep fields wet and slow emergence of seeds, she said.

``It is going to be difficult to get a big crop this year'' to meet rising demand for animal feed and alternative fuels made from corn, said Alan Kluis, president of Northland Commodities LLC in Minneapolis.

Corn futures for July delivery rose 16.5 cents, or 2.7 percent, to $6.295 a bushel at 11:04 a.m. on the Chicago Board of Trade, after earlier reaching a record $6.31. Most-active futures are up 73 percent in the past year as demand surged.

Farm subsidies destroy American manufacturing jobs by increasing input costs (like sugar quotas and price supports that increase U.S. sugar prices and thus drive American candymakers overseas or out of business). They don't just impoverish consumers of modest means, although they do that as well.

But the worst fact about farm subsidies is how they impoverish people in the Third World (how many people go hungry in Burkina Faso or Mali because of cotton subsidies here that destroy the livelihoods of cotton farmers in Africa?).

Much of the costs of farm subsidies are off budget and not even transparent to the public -- like the sugar subsidies I discussed above.

A five year farm bill enacted before the election would put the renewal in 2013, one year after the second term of the next President begins. If the President and Congress are of the same party, is there any hope then of a big change then? It's not an election year. 1973 and Nixon are the last such pairing that come to mind, and he had a few distractions to contend with.

Hans, One Question, "If it were in my interest and too my benefit, would you cut off your nose and ears to spite your face"? A heart felt sympathy and sentiment is no basis for a rational policy affecting the National Economy and its people. It's much akin to the realm of "Lifeboat Ethics. Hard decisions must be made to protect life and the boat. Even at the expense of others. Sentimentality has no place.

As for the cry of "high sugar prices", this was but a ruse to cover the maximazation of margins at the expense of workers by utilizing the offshoring mania of the "new global economy". Those companies that have a taken such advantage, I say good riddance. It's too bad we can't use the tariff tool on their products.

When it comes to National Economics, we are in a state of perpetual war. Such are the realities, succeed, or flounder and die.